Economic history

Germany, Greece and the Marshall Plan

Albrecht Ritschl is professor of economic history at the London School of Economics and a member of the advisory board to the German ministry of economics.

OLD myths die hard, and the Marshall Plan is one of them. In the New York Times of June 12th German economist Hans-Werner Sinn invokes comparisons with the Marshall Plan to defend Germany's position against Eurobonds, the pooling of sovereign debt within the euro zone. His worries are understandable, but the historical analogy is mistaken, and the numbers mean little. All this unnecessarily weakens his case.

Mr Sinn argues against Germany's detractors that Marshall Aid to postwar West Germany was low compared to Germany's recent assistance, debt guarantees etc. to Greece. While Marshall Aid cumulatively amounted to 4% of West German GDP around 1950 (his figure of 2% is too low but that doesn't matter), recent German aid has exceeded 60% of Greece's GDP, and total European assistance to Greece is now above 200% of Greek GDP. That makes the Marshall Plan look like a pittance. And it strips all the calls for German gratitude in memory of the Marshall Plan off their legitimacy. Or does it?

What Mr Sinn is invoking is just the outer shell of the Marshall Plan, the sweetener that was added to make a large political package containing bitter pills more palatable to the public in Paris and London. The financial core of the Marshall Plan was something much, bigger, an enormous sovereign debt relief programme. Its main beneficiary was a state that did not even exist when the Marshall Plan was started, and that was itself a creation of that plan: West Germany.

At the end of World War II, Germany nominally owed almost 40% of its 1938 GDP in short-term clearing debt to Europe. Not entirely unlike the ECB's Target-2 clearing mechanism, this system had been set up at Germany's central bank, the Reichsbank, as a mere clearing device. But during World War II, almost all of Germany's trade deficits with Europe were financed through this system, just as most of Southern Europe's payments deficits towards Germany since 2008 have been financed through Target-2. Incidentally, the amount now is the same, fast approaching 40% of German GDP. Just the signs are reversed. Bad karma, that, isn't it.

Germany's deficits during World War II were mostly robbery at gunpoint, usually at heavily distorted exchange rates. German internal wartime statistics suggest that when calculated at more realistic rates, transfers from Europe on clearing account were actually closer to 90% of Germany's 1938 GDP. To this adds Germany's official public debt, which internal wartime statistics put at some 300% of German 1938 GDP.

What happened to this debt after World War II? Here is where the Marshall Plan comes in. Recipients of Marshall Aid were (politely) asked to sign a waiver that made U.S. Marshall Aid a first charge on Germany. No claims against Germany could be brought unless the Germans had fully repaid Marshall Aid. This meant that by 1947, all foreign claims on Germany were blocked, including the 90% of 1938 GDP in wartime clearing debt.

Currency reform in 1948—the U.S. Army put an occupation currency into circulation, and gave it the neutral name of Deutsche Mark, as no emitting authority existed yet—wiped out domestic public debt, the largest part of the 300% of 1938 GDP mentioned above.

But given that Germany's debt was blocked, the countries of Europe would not trade with post-war Germany except on a barter basis. Also to mitigate this, Europe was temporarily taken out of the Bretton Woods currency system and put together in a multilateral trade and clearing agreement dubbed the European Payments Union. Trade credit within this clearing system was underwritten by, again, the Marshall Plan.

In 1953, the London Agreement on German Debt perpetuated these arrangements, and thus waterproofed them for the days when Marshall Aid would be repaid and the European Payments Union would be dissolved. German pre-1933 debt was to be repaid at much reduced interest rates, while settlement of post-1933 debts was postponed to a reparations conference to be held after a future German unification. No such conference has been held after the reunification of 1990. The German position is that these debts have ceased to exist.

Let's recap. The Marshall Plan had an outer shell, the European Recovery Programme, and an inner core, the economic reconstruction of Europe on the basis of debt forgiveness to and trade integration with Germany. The effects of its implementation were huge. While Western Europe in the 1950s struggled with debt/GDP ratios close to 200%, the new West German state enjoyed debt/ GDP ratios of less than 20%. This and its forced re-entry into Europe's markets was Germany's true benefit from the Marshall Plan, not just the 2-4% pump priming effect of Marshall Aid. As a long term effect, Germany effortlessly embarked on a policy of macroeconomic orthodoxy that it has seen no reason to deviate from ever since.

But why did the Americans do all this, and why did anyone in Europe consent to it? America's trauma was German reparations after World War I and the financial mess they created, with the U.S. picking up the bill. Under the Dawes Plan of 1924, Germany's currency had been put back on gold but Germany went on a borrowing binge. In a nutshell, Germany was like Greece on steroids. To stop this, the Young Plan of 1929 made it riskier to lend to Germany, but the ensuing deflation and recession soon became self-defeating, ending in political chaos and German debt default. A repetition of this the Marshall Planners were determined to avoid. And the U.S. led reconstructions of Germany and Japan have become the classical showcases of successful liberal intervention.

So does Greece, does Southern Europe need a Marshall Plan? Is Sinn right to say that Greece has already received one—or a 115-fold one, as he argues? The answer to first question may be yes, in the limited sense that a sweeping debt relief programme is needed. The answer to the second question is a resounding no. Greece has clearly not received a Marshall Plan, and certainly not 115 of them. Nor has anyone else. As far as historical analogies go, what Southern Europe received when included in the euro zone was closer to a Dawes Plan. And just like in Germany in the 1920s, the Southern Europeans responded with a borrowing spree. In 2010 we didn't serve them a Marshall Plan either, but a deflationary Young Plan instead.

This latter-day Young Plan is not even fully implemented yet. But we see the same debilitating consequences its precursor had around 1930: technocratic governments, loss of democratic legitimacy, the rise of political fringe parties, and no end in sight to the financial and economic crisis engulfing these states, no matter how many additional aid packages are negotiated. Woe if those historical analogies bear out.

Europe should learn from history. But it needs to learn fast. There might be no recovery unless debts are reduced to manageable proportions. That is what ended the Great Depression in Europe in the 1930s, and that is what in all likelihood is needed again. Professor Sinn is right to resolutely ask for action on this, even if his take on the Marshall Plan is wrong.

Greece was not only "ransacked" by the country´s own elite. Goldman Sachs, as well as important German banks and firms too, certainly contributed to; and benefited from this state of affairs. Nor can we talk about the complicity of the majority of the Greek population, which was actually suffering the regresive measures imposed by its very elite. You are failing to see that society is divided into interest groups. Would you say that the nazi regime enjoyed the complicity of the whole German population? If your answer is "no", then you are being biased against the Greek.
You are rigth, the Marshall Plan was designed by the countries that had destroyed part of Germany´s infrastructure. But if you refer to the German people as being a victim, why do you fail to see the Greek people as a victim too? Greece was occupied and plundered by the Nazis but now the German Foreign Ministry has decreed the issue of war reparations is no longer an issue. What about the postbellum Greece infrastructure, housing and labour force? Unlike the allies forces program after the WWII (which included Greece), Germany has not paid yet. Greece remains the only country to which Germany failed to pay war reparations.
We are talking about 7 billion one hundred million U.S. dollars 1938 purchasing power, ie 108 billion, without interest, today. We are also talking about a forced loan of $ 1.5 billion market value, 1938, ie 54 billion euros today. If Germany does not have to finance Greek recovery, then it should pay this at least.
By the way, Germany it is not financing any recovery. In fact, it is working for its own banks as most of the monies given to Greece by the EU (with the contribution of Germany) are going back in form of debt payments to German banks. Actually, Germany should be happy that everybody is contributing to this fund. They are profiting from this while destroying Greece and other European economies.
If you refer to Börries Albrecht Conon August Heinrich Freiherr von Münchhausen when you talk about the only German thing that Greece could use, then you should think about it twice. What you call "sophisticated explanations" is nothing else than the plain truth.

The US has paid a very high price for the euro crisis through never ending IMF eurozone bailouts. The US being the largest contributor to the IMF.
We are currently on the 3rd IMF eurozone bailout, the first bailout was for Greece, the 2nd for Ireland and the 3rd is for the euro firewall fund.
Americans, Canadians, Australians, Brazilians, Indians etc with their IMF contributions have all paid for the EU's stupidity and blunder in creating a one size fits all currency and for allowing Greece into the eurozone.
It is shameless that over 70% of IMF funds are going to the eurozone the richest part of the world while poor third world countries have to make do with the crumbs left over after greedy EU has taken the biggest chunk out of the IMF pie.

Great article. So if I read it correctly, the US allowed Germany to essentially write off all its debt after WW2. This enabled Germany to recover quickly. In 2012, Germany has not allowed Greece to write off any of its debt. Instead Germany and the EU has forced Greece to reduce spending in the hope that it will be able to pay back its debt in the future.
No wonder the extremist parties in Greece have become more popular.

All those ah, so sophisticated and deeply scientific explanations of the good professor are very nice, but they avoid couple of very important details:

1. Unlike Greece, Germany was a victim of a war. Yes, I do remember that Germany was the aggressor, the one who started that war, and so can be compared with a victim of a suicide attempt, but victim nevertheless.
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2. The state of postbellum Germany's infrastructure, housing, labour force, etc. cannot be compared to the post-2000 Greek one in any sane sense.
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3. The Marshall Plan was designed and financed by the countries whose air and ground forces had destroyed the biggest part of German economy... again, I agree that Germany, being the aggressor, had it coming, but her circumstances were certainly very different from that in which the Greek economy has found itself now. Greece was ransacked by the country's very own elite with active complicity of the majority of population.
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So Marshall Plan or no Marshall Plan, Germany doesn't owe and isn't required to finance Greek recovery. But there is something German which Greece could use: Freiherr Münchhausen, when had to pull himself from a (literal) quagmire, did it by pulling on his own pigtail.

A. Neither German banks and firms nor Goldman Sachs were simply "tools of choice". They were central architects of the current situation.
The Euro was born as an area populated by countries with different development levels. Germany was the most powerful of them. German trade surplus equals Europe trade deficit. Are you telling me that German banks and firms have not had the dominant position from the beginning of this game? Emphatically wrong. German banks monies are spread through the whole system. No wonder German banks are the ones who have the highest credit exposure after the beginning of the crisis. In the case of Greece, German firms directly participated in bribery and corruption too. Granted, the Greek government approved all of this, but this is not the whole population.
B. "public sector employees with 14 (!) monthly payments a year": A minority of the public sector employees. More than 90% of Greek population do not classify into this category (well paid employees, public or not). Before the beginning of the adjustment, most of the population earned yearly no more than 35 Thousand Euro. You can not talk about the whole population enjoying gigantic paychecks. Moreover, if you agree that there are different interest groups, then you have to accept that there is no rational reason whatsoever to punish a whole population, no matter what the issue at stake could be.
But true, the country had a shameful public deficit at the outbreak of the crisis. However, if you want them to pay, please be sure they are able to pay. Until now, the measures advanced by Germany (encouraged by its banks) have led to an increase (!) of this debt. This is insane and even bad for Germany.
On the other hand, neither Spain, nor Ireland nor Italy had such a bad starting point. In fact, Ireland and Spain were shown as examples of good governance...and look where they are now. The point is that this problem is not only about inflated salaries and big government alone.
C. How can you solve your differences among themselves when the leading financial authorities of the Union are responding to the interest of one specific group (namely bank sector)? Papademos and Monti are Goldman Sachs men and were undemocratically elected in Greece and Italy respectively! Mario Dragi, the new head of the ECB, belongs to the same clique too. Do you really believe that Goldman Sachs was only a “tool of choice”? C’mon!
German tax payers do not have to pay for the mismanaging of another country. Nobody has to do that. But, again, German tax payers are not paying to Greece, but to the German banks. This began with the huge bail out of the German banks by the German government until the present rescue plans. Actually, the question should be: Why are German tax payers (but also Spaniard,Italians or Greek tax payers) paying for the mess done by their banks, when they are not seeing one penny of the benefits achieved by the banks during the pre-crisis speculation era? On the contrary, the inequality in Germany has risen to worrying levels (more than in any other OECD country since 2000 http://www.oecd.org/dataoecd/50/49/49177659.pdf). It is not about Greece against Germany, as the media wrongly promotes. But this kind of manipulation helps to redirect the anger of German tax payers toward other objective than the actual starters of the crisis.
D. The human cost of the Greek civil war was huge, but are you seriously suggesting that it is comparable to the costs of the Nazi occupation? Greece was devastated by the Germans as no other country under their occupation. The International Red Cross has estimated that between 1941 and 1943 at least 300,000 Greeks died from starvation – the direct result of the plundering of Greece by the Germans. Even Mussolini(the first invader of Greece) complained by saying that “The Germans have taken from the Greeks even their shoelaces”. True, Bulgaria was also an occupier during the WWII, but again, are you comparing the impact and responsibility of the German Nazi regime with the puppet governments that emerged after and because of it? It does not make any sense.
"you can't base today's Greek claims to Germany on the situation of 70 years ago". Absolutely wrong. Italy and Bulgaria paid war reparations to Greece. $105 and $45 millions respectively. Greece demanded from Germany payment of the occupation loan in 1945, 1946, 1947, 1964, 1965, 1966, 1974, 1987, and in 1995. However, Germany is consistently refusing to pay its obligations to Greece arising from the occupation loan and war reparations. In 1964, German chancellor Erhard pledged repayment of the loan after the reunification of Germany, which occurred in 1990. Understandably, many have suggested Germany to take a more chaste approach in the euro crisis of 2008-2011, as it could face renewed and justified demands for WWII reparations.
What you do in the past haunts you until the present, unless you face it properly.

The U.S. bought West Germany in the midst of the Cold War to stop it going Communist, it wasn't altruism. It was money well invested in hard working and grateful people despite having their cities bombed to smithereens and having to begin from stretch. Germany should not have gone on subsidizing these PIGS, it's a no win situation what with people claiming entitlement to money they didn't earn and governments so excessively corrupt they can't be trusted to run the country.

A great history lesson. True altruism probably does not exist. Even the most apparently self-giving actions have a lining of serving one's interests, even if indirectly (think, I do it because I would like other's to do the same for me, where I in that situation). Even if the US laid out the Marshall Plan to cut-off any chances of Western Europe falling into the orbit of the Soviets, what counts here is that the plan was masterfully thought-out and implemented. Compare that to the botched, patch-work, clumsy and ever-one-step-behind EU response to it's own euro crisis. The other lesson to be learned is for all those invoking moral hazard risks as an excuse not the help out it's fellow eurozone citizens. Tell me more about moral hazard when Germany received in exchange for their wartime efforts to dominate Europe a clean slate of all the debt they had accumulated in their war effort. I think more generosity and less moral judging is what we need from our leaders and EU citizens. Let's get this over with, pronto. We have the means. Spain, Portugal, even Greece have put in place very ambitious reform programs, time to help out those who have proven they are willing to reform their economies and stop the arguing or soon there will be no EU left to speak of and in it's place a whole new Europe of extremists and intolerance: 60 years wasted.

I don't know about effect of a Syriza victory on the Asian markets, but its effect on Greece would be devastating indeed.
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Relatively sound economies (like the Czechoslovakian in 1948, just to give one example) in the hands of brainless Lefties were successfully ruined in no time, what about the wreck which the contemporary Greek economy is?

True, you have to deal with the puppets. But they are doing it. The ascension of Syriza is not accidental. However the puppeteers are strong. And unfortunalely dead wrong too. This shows the kind of powerful influence that prevents other interest groups in the same country from advancing different alternatives. If this is true, then it is not only about "fellow countrymen". It is both an international and a historical responsability to solve this issue, and this includes the ECB, the IMF and, of course; Germany.
The wrong guys got elected. But if they really are, as you say, scoundrels, then I don´t know how you can trust their decisions. They are going to try to achieve something different by employing the same means in the same order. The definition of insanity. It will fail; and everybody knows that.
To say that "Syriza would make the famine of the 1940s look like the time of prosperity" is ideologically , but not rationally grounded. It is your opinion and I respect it, but it is not factual.

Yep - and a somewhat similar situation applies to Ireland too. Ireland's government took on the HUGE debt from Irish private sector banks to ensure the creditors (Germany and France) would be paid back. Poor Ireland :(

I agree. There should be a debt forgiveness. Not only for Greece, but for the whole world. The natural development of capitalism leads to more and more debts nd the income gaps become bigger and bigger, because every debtor also needs a creditor. The amount of debts lead to crises and political instability.

Well, this group was formed in 1954... aw, yes, now I know - they can travel in time (thus instigating Pearl Harbor, or introduce the guillotine in France) but being the general stuff keep that under wraps.
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Well, fat chance - the organized and (almost) united workers of the world will haul down the veil of secrecy off this conspiracy.